Joint Roadmap: Reform Analysis in Ukraine’s New Coalition Agreement

This article analyzes the draft coalition agreement (CA) submitted on the 14th of November

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This article analyzes the draft coalition agreement (CA) submitted on the 14th of November, building upon VoxUkraine’s analysis of the CA initialed[1] on the 21st of November by representatives of political parties that formed a coalition in the Verkhovna Rada (eighth convocation) and analysis of the pre-election programs of the parties involved. Representatives of Bloc of Petro Poroshenko (BPP), People’s Front, Samopomich, Radical Party, and Batkivshchyna signed a CA at the first plenary session of the Verkhovna Rada.

The Preamble of the Agreement sets out the following principles:

  1. Conflict resolution in the East, return of the lost territories, protection of rights and freedoms of citizens of the occupied territories, captives and refugees; development of national defense capability.
  2. The investigation of crimes committed during the Revolution of Dignity.
  3. The package of economic, political, administrative and social reforms, which are based on the Association Agreement between Ukraine and the European Union (EU), with the common goal of bringing Ukraine to the level of political and socio-economic development that is necessary for full EU membership.
  4. The members of the coalition promise to provide the highest level of accountability and transparency of their activities, fight corruption in all its forms, and generally proclaim the “full political responsibility,” together with the other branches of Government, as far as reform implementation goes.

It is reasonable to assume that these statements should reflect the priorities of the Coalition and, thus, they will be a basis for the program of the Government (Coalition Regulations in Section 5.1 directly indicate that ” provisions of the CA are the basis for the Action Program of the Cabinet of Ministers of Ukraine”). This article poses the question whether there is some place in the CA for reforms important to Ukraine’s international partners, especially donors. Moreover, I verify whether the biggest drawbacks stressed here and there were eliminated.

To formalize the analysis I will refer to the political risk rating system The International Country Risk Guide (ICRG) by PRS Group (www.prsgroup.com). The ICRG methodology has been used since 1980, and it has its origins in the research of Professor William Coplin and Michael O’Leary from Syracuse University in collaboration with the U.S. Department of State and the CIA. Currently it is used by the International Monetary Fund and approved by such prestigious publications as Barron’s, The Economist, and The Wall Street Journal. The purpose of the ICRG model is to forecast financial, economic and political risks for international investors. The system covers 22 components grouped by a type of risk. Most useful for evaluation of the CA is an evaluation of political risk, consisting of 12 components. This includes not only political risks, such as corruption or external conflict, but also some economic risks.

Although, as was mentioned above, the target audience of ICRG ratings is international investors who evaluate risks in particular country, numerous empirical studies have shown that these ratings can accurately approximate and compare cross countries the theoretical concept of “institutional development”. In addition, the result of 15-20 years of research in the field of economic development is a consensus that a high level of institutional development positively influences economic performance, market development, capital inflows, and many other goals Ukraine strives for.

Below, I define three main directions of reforms declared in the initialed version of the CA and split the 12 components of the ICRG political risk rating accordingly (the detailed definition of the components is provided in Appendix here INSERT the LINK). Then I analyze the CA along these directions.

 

Direction 1 (Political and Administrative Reforms)

Corresponds to the following components of the ICRG political risk rating: Government Stability; Democratic Accountability; Bureaucracy Quality; and Corruption.
Here we should pay attention to the following issues and find out whether they were discussed in the CA:

  • Has a system of checks and balances been worked out?
  • Is there a consensus in comparison to the CA version of November 14 and the election programs? What kind of consensus is it? This latter will determine the effectiveness of the coalition and its collaboration with the Government.

Chapters of the CA, corresponding to this direction are
II. CONSTITUTIONAL REFORM.
III. RENEWAL OF GOVERNMENT AUTHORITY AND ANTI-CORRUPTION REFORM.
IV. JUDICIAL REFORM.
VI. ELECTORAL REFORM.
VII. DECENTRALIZATION AND REFORMS OF PUBLIC ADMINISTRATION.

Constitutional reform aimed at development of an effective system of political “checks and balances” should be a basis for lowering the risk within this direction. It should be clearly identified as a core for political reforms, and all other reforms should be worked out in accordance to this principle. My colleagues in VoxUkraine negatively evaluated Chapter II of the CA, dedicated to constitutional reform, since it contains absolutely nothing related to checks and balances, except for the proposal to create a Committee on the Constitutional Reform. Some points, such as weakening of executive power are mentioned “between the lines” in other parts of the CA (e.g., to adopt the Law on the Impeachment of the President in chapter on reforms of public administration), however, a number of key reforms needed to achieve independence and competition among branches of power, are poorly or insufficiently worked out.

One of the widely known problems of Ukraine is judicial system. Professionalism, independence from other branches of Government, and public accountability of judges is a necessary and high-priority reform. In my mind, judicial reform should be implemented in conjunction with anti-corruption reform and, possibly, ahead of the experiments with administrative and territorial decentralization. The chapter on judicial reform (Chapter IV) mostly contains declarations without specific mechanisms. The Coalition is willing to empower some vague “authorities” who will appoint the judges and monitor their activities but has little faith in the ability of the public to influence these processes. Among the positive (and concrete) proposals one can mention larger influence of attorneys in the justice system (for example, by strengthening their lobbying capabilities through self-management), reducing the role of prosecutors, the “maximum unification of jurisprudence,” and some suggestions to speed up the decision making process. While adding powers to attorneys, the CA offers to weaken judicial self-government which will diminish the judiciary’s opportunity to lobby their interests. The logic on the latter measure is not clear, because by increasing control over judges of means of transparency, streamlining of procedures, anti-corruption measures, etc. judges are deprived of the means to insure their independence. Judging from the CA, the Coalition is going to implement a number of tough measures against judges (which is understandable if we take into account the current discredited system) to the detriment of creating a judicial branch, equally important to the legislative and executive authorities.

Considering the above, it seems the authorities are trying to compensate the lack of judicial reforms with overwhelming and immediate administrative and territorial decentralization (see Chap. VII, Part 1 Decentralization and Reforms of the Local Governance). In my opinion, greater autonomy of local communities is not equivalent to greater independence of the judiciary. The latter is a fundamental principle of a democratic society, and appropriate reforms have to be implemented immediately. As well as the reform of public administration, quite clearly discussed in the second part of the Chapter VII, but some points of which need to be better specified (for example, what is the role of the State Secretaries?). Ukraine needs a more transparent and efficient system of public administration, and reasonable measures proposed in the CA can be implemented immediately. In contrast, reforms aimed at administrative and territorial decentralization should be implemented more carefully, as pilot projects, or gradually while evaluating the effectiveness in providing local communities with fiscal and administrative autonomy.

The proposed reform of electoral legislation (Chapter VI of the CA) provides a consensus in society that electoral system based on proportional and majority rules of election to the Verkhovna Rada has lost its appeal and should give a way to a proportional system based on the open party lists. The same system should be used on all lower levels, except for the micro-level of village councils, which would retain the majority system. We can expect more competition in the election of mayors of major cities (held in two rounds). Apparently, the members of the Coalition believe that the Ukrainian political system and civil society reached a level of maturity that is required for the emergence of a broad spectrum of political parties that can represent the interests of all regions and layers of the population. However, the recent elections to the Parliament have showed that parties still mostly are formed around specific political leaders and not around a variety of ideologies.

Nevertheless, the elections showed that the ideological spectrum of modern Ukrainian parties is quite wide. We can only hope that the proposal to ensure the parties’ responsibility for failure to provide the information about sources of funding will be implemented, Same goes about the other measures governing the “rules of conduct” during elections. In any case, elements presented in this chapter will create additional conditions for more accountable and independent legislative branch.

A majority of international organizations, politicians and experts, as well as Ukrainians, unambiguously identify corruption to be the biggest problem in Ukraine. In this regard, Ukraine is not alone because corruption is an integral part of post-socialist transition economies. The only difference is that, in most cases, our Eastern European neighbors found political and civic will to overcome or greatly reduce the problem of corruption while in Ukraine there is no progress. Research suggests that overcoming corruption is one of the most important institutional reforms determining economic growth. What does the CA of the Parliament of the 8th convocation have in this regard? In general, the Coalition declares enviable determination regarding the fight against corruption. Similarly to pre-election promises of most parties, the fight against corruption and “renewal of government authority” are on the front burner and placed in the beginning of the CA (Chapter III).

As my colleagues from VoxUkraine noted, the emphasis is placed on the penitentiary component and control by creating several agencies (Anti-corruption Bureau and National Bureau of Corruption Prevention) to prevent and reveal corruption by local and state authorities. The proposed adequate funding of these agencies, competitive principles of hiring their employees and their co-operation with, hopefully, reformed Prosecutor’s Office are indispensable conditions for their effectiveness. The initiatives of the President of Ukraine to appoint foreign residents to leading positions in these agencies and in the Cabinet is also interesting. Additionally it is suggested to increase the transparency of Government agencies as much as possible, obliging them to publish data and reports on their actions for public and institutional control.

The risks in this process include the lack of a comprehensive approach to reforms aimed at tackling the sources of corruption in society and as a result prevalence of short-term goals (such as pumping up the budget with the help of the “state racketeering”), party’s interests, or personal ambitions over the interests of society, adjustment of old corruption schemes to new conditions and lack of drastic changes in this area for business and society.

Direction 2 (reform of the security sector and legal reforms)

Corresponds to the following components of the ICRG political risk rating: Law and Order; Internal Conflict; External Conflict; and Ethnic Tensions. Let’s see what measures in the CA are intended  to

  • protect of the state and citizens from internal and external conflicts?
  • secure of the rule of law?
  • resolve tensions between the East and West of Ukraine?
  • reject the “multi-vector approach” in foreign policy? What would be the relationship with the Russian Federation?

Chapters of the CA, corresponding to this direction are

  1. Reform of National Security and Defense
  2. Reform of Law Enforcement

Both chapters referring to this direction of reforms are worked out in detail in the CA and contain a number of concrete steps that are quite feasible (in this regard, I agree with my colleagues from VoxUkraine). It is gratifying that the majority of the Parliament and the President at last came up with a clear ideology of further political and economic development of Ukraine. Based upon the Chapter about the reforms of national security and defense (Chapter I), “multi-vector approach” in foreign policy (maneuvering between Russian Federation and Europe, based upon the neutral status) seems to sink into oblivion. It is quite possible that Ukraine with move closer towards Euro-Atlantic security system and take steps to comply with the criteria for the NATO membership. Judging from public statements, politicians are aware that this is a long process and success also depends on economic and institutional reforms. The MPs, as well executive branch, should build and strengthen the consensus in society about these directions of development. It is my deep conviction that success of reforms depends on the existence of unified and clear ideology that is understood and shared within Ukrainian society at all levels and in all regions. Resistance to external threat and European integration (and as a part of it, accession to the NATO) can be such political ideology. Unfortunately, the price paid for having this ideology galvanized in Ukrainian society is very high.

In any case, proposals concerning the reforms in national security and defense reflect realities of modern military conflicts (hybrid war, etc.) and geopolitical situation of Ukraine (the neighborhood with the Russian Federation). The measures include, among others, an emphasis on development of  intelligence services within the Armed Forces and counterintelligence as a part of the State Security Service of Ukraine, increasing military presence in the East of Ukraine, creation of modern army that meets NATO standards and capable of rapid response, information security,  better  military education of the armed forces, and military training of the population, including organization of the territorial defense. Apparently, the role of the Council for National Security and Defense (the SNBO) in the overall coordination of state security will be strengthened. It is not clear how the relevant Government agencies (e.g, between intelligence, counterintelligence, and the State Security Service of Ukraine) will cooperate, especially in the conditions of a direct military threat. Natural autonomy of these agencies should not lead to an unhealthy competition but to provide uninterrupted exchange of information and coordination of effort.

The declared increase of spending on defense (up to 3% of GDP) and financial security of servicemen are reasonable measures if the authorities create understanding and support within the society that for this purpose it needs to cut other expenses. Time will show whether it will be social sphere, education, or costs of state bureaucracy (refer to the article of lona Solohub of Kyiv School of Economics about which government agencies should go). In the meantime, the public needs to understand that it is the existence of Ukrainian state on the agenda and that the priority of these reforms is entirely justified. A little bit controversial is the section about the reforms of the defense industry where CA simultaneously calls to achieve import substitution while encourages cooperation with foreign companies (EU, the USA, Canada, and others) in weapon development and production.

Much attention is given to the return of Crimea, restoring control over the parts of Donetsk and Luhansk regions. I want to hope that the Ukrainian state, not just volunteers, will finally begin to help refugees and displaced persons, as it is stipulated in the CA. Apart from the provision of government services in the territories bordering the zone of ATO, one could foresee a special regime of entrepreneurship there, in order to consolidate the efforts of volunteers and to employ refugees and citizens living on the occupied territories. This could be a more systematic way to satisfy the needs of ATO (in short-run) and subsequently help to renew the affected territories with the help of the private business. I also did not find in this Chapter the considerations about the policy on participants of ATO who are not the members of the Armed Forces and National Guard (that is, the volunteer battalions). I want to believe that military conflict will be successfully completed in less than the 4 years of the 8th Rada tenure. It is necessary to plan for the reintegration of ATO soldiers into civilian life right now.

The provisions of Chapter V concerning the reforms of law enforcement offer a radical reorganization of the entire system. I agree with my colleagues from VoxUkraine, that these reforms are possible and necessary to carry out immediately. In principle, reorganization of the Ministry of Internal Affairs has already begun with the elimination of the special units, such as Berkut, lustration, etc. We have to just keep up the speed. Apart from clear and, in general, logical new system of the Ministry of Interior, the CA declares the right priorities to improve the professionalism of officials (through the system of certification and selection and a three-tier system of training), divide the authority, and improve the transparency of the new structures. In addition, the authors of the chapter realistically acknowledge that the reform should be carried out step-by-step (for example, unification of Border Control and Migration Services will be carried out later). Despite the overall positive impression after reading this Chapter I would like to mention two areas where there may be a conflict of interest. It is unclear what is functional difference between the State Bureau of Investigation and National Bureau of Corruption Prevention. How would the municipal police and (national) public security police will divide the authority?

Direction 3 (economic reforms)

The ICRG rating system evaluates financial and economic risks, based on more traditional economic indicators. Nevertheless, the political risk rating includes two components that refer to long-term institutional development. This is the protection of investors from expropriation and unfair competition (the Investment Profile) as well as Socioeconomic Conditions that can cause pressure on the Government or an increased level of discontent in society. What reforms stipulated by the CA should ensure

  • the protection of property rights;
  • contract enforcement;
  • free competition and equal rights and responsibilities of all participants of market relations;

as well as to reduce such social and economic problems as unemployment, low consumer confidence, and poverty?

There is number of chapters in the CA that meet this direction, namely:

VIII. ERNSURING ACCELERATED ECONOMIC DEVELOPMENT

  1. REGULATORY POLICY, BUSINESS DEVELOPMENT AND COMPETITION SUPPORT
  2. FINANCIAL SECTOR REFORM
  3. AGRICULTURAL REFORM

XII. ENERGY INDUSTRY AND ENERGY INDEPENDENCE REFORM

XIII. INFRASTRUCTURE AND TRANSPORT

XIV. PROVISIONS OF CITIZENS WITH HOUSING AND PUBLIC UTILITY SERVICES AND HOUSING POLICY REFORMING.

  1. SOCIAL AND HUMANITARIAN REFORM

XVI. SAFETY AND HEALTH REFORM SYSTEM

XVII. REFORM OF ENVIRONMENT MANAGEMENT SYSTEM AND ECOLOGY POLICY INTEGRATION INTO OTHER TRADE POLICIES

 

Despite the fact that the current Parliament consists a fairly large number people with economics background, it is clear that critical for this direction economic and financial reforms are unfortunately flawed. These chapters often contain populist slogans copied from the election programs, or obviously harmful proposals. I would like to underline the provisions most incompatible with the reduction risks emphasized by the ICRG in this section.

Unfortunately, in Chapter VIII about accelerated economic development the provisions related to the “industry-drivers” and promotion (by the State) of domestic producers to world markets have survived. I have criticized them here before and I want to say again that the desire to create the priority sectors (whether they are agriculture, high-tech, or defense) or provide direct or indirect guarantees to investors (except the guarantees of property rights and the security of investment) tend to distort market mechanisms and can be expensive and counter-productive. Instead, politicians should pay attention to creation of institutions that protect property rights, enforce contracts, and ensure equal opportunities for companies in any industry, on any size, ownership, or nationality. According to research, these reforms will facilitate inflow and de-shadowing of capital, development of entrepreneurship, and economic growth, and, hence, reduce social tensions stemming from economic insecurity, unemployment, and poverty. The lobby groups representing the new “priority sectors”, which may be behind the current coalition, could “require what belongs to them” from the new Parliament and Government, and would kill all the reforms. The coalition should really convince the public and foreign investors that its members are able to overcome this pressure and put the public interest at the forefront. For this purpose we should focus on the Direction of Reform 1 and 2I specify in my piece, as well as such measures mentioned in Chapter VIII as intellectual property protection, and possibly, but not necessarily, public investment in infrastructure. Let the market be a catalyst for foreign investment and for development of producers and exporters.

Equally disastrous provisions were found in Chapter IX on regulatory policy and protection of competition. It is unclear why the state should “facilitate access to foreign markets products with high added value” (Section 5.1), or to create “a special agency for insurance and financing of exports” (Part 5.5). Commercially viable enterprises, by definition, would themselves find sources of financing and niche in world markets. Except for these inconsistent provisions this chapter contains many useful proposals, such as simplifying of starting the business, increasing the transparency of the Antimonopoly Committee, optimizing and “humanizing” of taxation, reducing the administrative control over business, optimizing of foreign trade and construction industry. To ensure that these proposals become effective, the state must convincingly “tie their hands” and eliminate the natural tendency to halt reforms once the business is out of the shadow. These are the same checks and balances that need to be built between the branches of government but in the relation to regulatory reform. Elements of such checks are only visible in Section 2 of Chapter IX concerning antitrust regulations.

Chapter X about financial sector reform is frustrating for an economist. If the Coalition intends to pay attention to it later (in one place the CA mentions the year of 2016), it should identify the main areas for reform for general information, without going into details such as “bring everything in line with EU standards in the field of A, B, C…” For example, we can define measures to improve the independence and consolidation of functions of the National Bank and the National Commission on Securities and Stock Market. Both bodies must be truly independent from the President, parties, Parliament, and Cabinet. The measures for liberalization of capital flows and foreign exchange transactions in Part 2.1 in general are justified. The reforms on improving corporate governance in Section 2.3 contradict each other. The best general provision related to corporate governance in the competence of the Parliament would be to oblige businesses of all sizes and types to provide their financial data to statistical bodies. The legislator may also focus on improving the transparency of financial services and instruments offered to investors (not only their benefits but also the risks must be known to investors) and also on tougher responsibility for distortion of such information, predatory credit practices, breach of fiduciary duty, unfair use of insider information and other violations in financial sector. Finally, we can legally cancel any restrictions on foreign investment in the financial sector, up to one hundred percent control.

My colleagues from VoxUkraine are not very satisfied with the proposals for reforms in the social and humanitarian sphere (Chapter XV). Better education is important because it is a prerequisite for improving the quality of state officials (one of the components ICRG) and, indeed, accelerated economic growth. Revision of social security system is needed due to the realities of public finances in the short term and need to live within our means afterwards. Unpopular reforms in the social sphere (if carried out, not just declared) are always difficult politically. In the short-run they can objectively exacerbate social and economic risks, which ICRG takes into account. However, the reduction of social benefits can be met with understanding if accompanied by public awareness of its causes and coincide with the cuts in the expenditures on the state apparatus. The state should set an example of frugality, especially in relation to itself. What do we see in Chapter XV? In the section on Social Security of the Coalition cannot decide what should be social, health and pension insurance: public, private, mixed? That is, there are no ideas. Among the positives, there are proposals to simplify applying for social assistance, limiting the accompanying documents to just an application form, and to reduce the losses because of the fraudulent claims of social benefits (liability of the submission of false information, audit of social payments, targeted assistance to those most in need).

The education reform in general is not bad. Here are decentralization of management of education, and greater autonomy for universities, and improvement of the university network. If latter refers to consolidation and elimination of “universities” and “academies” of questionable quality, then combined with the development of the professional education this measure is justified. Of course, some competition in the education sphere is important. But, in my opinion, the creation of non-governmental Supervisory Boards in public universities and private sector involvement in decisions about the priorities of education and research are more reasonable than existence of dozens of pseudo-universities that would allegedly compete with public education. Public and private professional and applied educational institutions can be a source of competition. Therefore, the proposal to involve employers into professional education is a good sign in the CA. Most importantly, the prestige of blue-collar workers and applied professions should be enhanced within the society.[2]

The only sensible suggestion in the part related to the “modern science and innovation” is a call for protection of intellectual property rights and tax immunity for scientific research grants. Though it is necessary to specify the former and establish a mechanism such that the latter won’t become a mechanism of tax evasion. Otherwise in this section post-Soviet way of thinking about “priority sectors” dominates in this case, in science.

Set of measures for cultural and information policy is the most novel, although establishment of quotas for “national cultural product” in the media and “control for studying of foreign languages” raises eyebrows. I would like especially to note a univocal opinion on the status of Ukrainian language as the only one official language, and measures to ensure freedom of the press and media. However, recent initiatives by the Coalition (the notorious Ministry of Information) give rise to some concerns regarding the implementation.

I omit the analysis of the remaining sections of the CA because I cannot give a professional assessment of their situation. Readers are encouraged to read their analysis by the specialists VoxUkraine.

 

Conclusion

In conclusion, I would like to stress that it is not clearly stated in the CA what will be the consequences for the parties and MPs in case for total or partial non-compliance with the agreement. For example, the last part of the CA (the Coalition Regulations) very precisely stipulates the mechanisms of control over the Cabinet regarding the implementation of the reforms written in the CA. How about the coalition itself? Is it enough that there is a well-defined coalition in the Parliament and it signed the Coalition Agreement? Declared elimination of all immunities of officials from criminal responsibility, cancellation of the MP’s immunity, MP’s accountability to society and the rule of law in their work and can be such mechanisms provided there is further development of civil society, freedom of the press and media, immediate judicial reform, and development of an effective system of checks and balances between branches of power as a whole.

 

In addition, most of chapters in the CA contain timelines for reforms, which also gives the opportunity to evaluate their implementation. The fact that most of the reforms agreed in CA should be implemented in 2015 casts some doubt on the feasibility of these commitments. In the first days of the new Cabinet (re-elected) the Prime Minister A. Yatseniuk said in 2015 we have to “survive” in order for 2016 to become a year of Ukraine’s economic stability.

Of course, creation of democratic pro-European coalition that has a clear majority in Parliament will allow making quick decisions, although the lack of effective opposition in Parliament is unhealthy. Let’s hope that MPs, the Cabinet, and the President will have enough political will and “altruism” to pay special attention to reforms which are of priority for foreign investors (and for successful countries) throughout the world and are shown, in particular, in rating system of political risk ICRG. The provision 5.5 of the Coalition Regulations raises the hope that consideration of laws necessary for signing the Association Agreement between Ukraine and the European Union will be a top priority of the Coalition.

 

Appendix: THE POLITICAL RISK COMPONENTS ICRG by PRS Group

Source: PRS Group, International Country Risk Guide (New York: PRS Group, 2001).

Government Stability: This is an assessment both of the government’s ability to carry out its declared program(s), and its ability to stay in office (Government Unity; Legislative Strength; Popular Support)

B Socioeconomic Conditions: This is an assessment of the socioeconomic pressures at work in society that could constrain government action or fuel social dissatisfaction (Unemployment; Consumer Confidence; Poverty)

C Investment Profile: This is an assessment of factors affecting the risk to investment that are not covered by other political, economic and financial risk components (Contract Viability/Expropriation; Profits Repatriation; Payment Delays).

D Internal Conflict:  This is an assessment of political violence in the country and its actual or potential impact on governance. The highest rating is given to those countries where there is no armed or civil opposition to the government and the government does not indulge in arbitrary violence, direct or indirect, against its own people. The lowest rating is given to a country embroiled in an on-going civil war (Civil War/Coup Threat; Terrorism/Political Violence; Civil Disorder)

E External Conflict: The external conflict measure is an assessment both of the risk to the incumbent government from foreign action, ranging from non-violent external pressure (diplomatic pressures, withholding of aid, trade restrictions, territorial disputes, sanctions, etc) to violent external pressure (cross-border conflicts to all-out war). External conflicts can adversely affect foreign business in many ways, ranging from restrictions on operations, to trade and investment sanctions, to distortions in the allocation of economic resources, to violent change in the structure of society (War; Cross-Border Conflict; Foreign Pressures).

F Corruption: This is an assessment of corruption within the political system. Such corruption is a threat to foreign investment for several reasons: it distorts the economic and financial environment; it reduces the efficiency of government and business by enabling people to assume positions of power through patronage rather than ability; and, last but not least, introduces an inherent instability into the political process. The most common form of corruption met directly by business is financial corruption in the form of demands for special payments and bribes connected with import and export licenses, exchange controls, tax assessments, police protection, or loans. Such corruption can make it difficult to conduct business effectively, and in some cases my force the withdrawal or withholding of an investment.

Although our measure takes such corruption into account, it is more concerned with actual

or potential corruption in the form of excessive patronage, nepotism, job reservations, ‘favor-for-favors’, secret party funding, and suspiciously close ties between politics and business. In our view these insidious sorts of corruption are potentially of much greater risk to foreign business in that they can lead to popular discontent, unrealistic and inefficient controls on the state economy, and encourage the development of the black market. The greatest risk in such corruption is that at some time it will become so overweening, or some major scandal will be suddenly revealed, as to provoke a popular backlash, resulting in a fall or overthrow of the government, a major reorganizing or restructuring of the country’s political institutions, or, at worst, a breakdown in law and order, rendering the country ungovernable.

G Military in Politics: less relevant

H Religion in Politics: less relevant

I Law and Order: Law and Order are assessed separately, with each sub-component comprising zero to three points. The Law sub-component is an assessment of the strength and impartiality of the legal system, while the Order sub-component is an assessment of popular observance of the law. Thus, a country can enjoy a high rating in terms of its judicial system, but a low rating if it suffers from a very high crime rate of if the law is routinely ignored without effective sanction (for example, widespread illegal strikes).

J Ethnic Tensions: This component is an assessment of the degree of tension within a country attributable to racial, nationality, or language divisions. Lower ratings are given to countries where racial and nationality tensions are high because opposing groups are intolerant and unwilling to compromise. Higher ratings are given to countries where tensions are minimal, even though such differences may still exist

K Democratic Accountability: This is a measure of how responsive government is to its people, on the basis that the less responsive it is, the more likely it is that the government will fall, peacefully in a democratic society, but possibly violently in a non-democratic one. The points in this component are awarded on the basis of the type of governance enjoyed by the country in question (Alternating Democracy; Dominated Democracy; De-facto One-Party State; De jure One-Party state; Autarchy

L Bureaucracy Quality; The institutional strength and quality of the bureaucracy is another shock absorber that tends to minimize revisions of policy when governments change. Therefore, high points are given to countries where the bureaucracy has the strength and expertise to govern without drastic changes in policy or interruptions in government services. In these low-risk countries, the bureaucracy tends to be somewhat autonomous from political pressure and to have an established mechanism for recruitment and training. Countries that lack the cushioning effect of a strong bureaucracy receive low points because a change in government tends to be traumatic in terms of policy formulation and day-to-day administrative functions.

[1] Initial – mark or sign (a document) with one’s initials in order to authorize or validate it. (Oxford Dictionaries. Oxford University Press, 2014. URL = http://www.oxforddictionaries.com/definition/english/initial )

[2] The experience of the Netherlands in this regard can be instructive. At the level of the middle school (12 years) there is a recommended distribution of pupils onto three levels of difficulty, depending on the performance in the middle school and taking into account the preferences of the pupil and his/her family. The lower level (4 years) is intended to the job market, the middle level (5 years) prepares for the higher specialized educational institutions, and the highest (6 years) is necessary for entering a university. Pupils can under certain conditions switch to a higher level.


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